A&R Quality Advisors is a small consulting firm offering quality audits and advising services to small and mid-sized manufacturing firms. Quality audits entail reviewing, checking, and documenting quality practices within a firm. Quality advising entails making recommendations for new or revised quality practices. Other firms in the area offer one or both of these services, although the competition for quality audit jobs is stronger than for quality advising.

In addition to senior executives, A&R employees are either staff or managers. Staff employees are usually younger with less experience. Managers, who oversee the staff on jobs, are more experienced. The average hourly wage is $160 for staff and $400 for managers. (Both staff and managers are paid an annual salary; these hourly costs are based on 2,000 average annual hours worked.) Staff are expected to spend at least 90 percent of their time on billable work. Because of administrative work associated with supervising the staff and the expectation that managers will spend a portion of their time seeking new business, managers are expected to spend about 50 percent of their time on billable work. A&R employs 10 staff and two managers.

In addition to staff and manager costs, A&R has overhead and administrative costs of $6,600,000, of which about $2,200,000 is variable with respect to billable hours. Overhead and administrative costs include the nonbillable cost of the staff and managers.

Selected information on billable hours expected for the next year follows:

 Billable Audit HoursBillable Advising HoursTotal Billable HoursStaffManagerStaffManagerStaffManagerClient 01

170

32

220

30

390

62

Client 02

210

30

0

0

210

30

Client 03

240

50

100

35

340

85

⋮

⋮

⋮

⋮

⋮

⋮

⋮

Client 49

60

22

0

0

60

22

Client 50

320

40

220

35

540

75

Total

9,500

2,200

10,500

1,800

20,000

4,000

Although not all clients use A&R for both services, about 70 percent do.

A&R bills audit services based on billable hours and advising services at a fixed fee. The cost for audit services is determined by multiplying the billable hours by the quoted employee rates. Staff rates for the following year are $300 per hour, and manager rates are $750 per hour. The rates are set to meet the competition in the area.

To determine the cost (not the price) of the job, A&R uses a job costing system. To the employee costs (not the billing rates) is added an amount for overhead based on the predetermined rate and the billable hours in the job. The predetermined rate is based on expected billable hours.

Total revenue at A&R next year is expected to be $12 million.

The two founding partners of A&R are looking at these forecasts for next year and trying to decide whether to drop one of these services. “We should probably become more focused, as we sometimes remind our clients.”

Required:

What is the predetermined overhead rate for costing jobs in the following year?